Daniel Borenstein: Lawsuit certain over state law that curbs pension spikes of up to 24 percent

Public employee retirement systems in Contra Costa, Alameda and Merced counties plan to reduce pension spiking starting Jan. 1 to comply with a new law Gov. Brown signed in September.

Workers have vowed to sue. They will allege they were promised they could boost their pensions by cashing in unused vacation and holiday leave time. And they will claim that abridging that promise violates constitutional contract protections. The outcome could help determine just how invincible public employee pension rights are.

There's significant money at stake. For example, in Contra Costa, a union-represented management employee with 30 years on the job who retires this year can boost his monthly pension payments for the rest of his life by up to 24 percent. If he retires after Jan. 1, the maximum spike will be cut to 4 percent.

For nonmanagement Contra Costa workers, the spike of up to 15 percent will be totally eliminated next year under the new law.

On Tuesday, Contra Costa County Employees' Retirement System directors voted 7-2 to enforce that law, just as the systems in Merced and Alameda counties had already decided to do. They had no option. The only issue is whether the law is constitutional -- and that's up to a court to decide.

The law was crafted and passed in August on the final day of the legislative session to fix a gaping loophole in a larger bill of pension rule changes. The smaller bill affects 20 county-level pension systems in California, but most significantly Contra Costa, Alameda and Merced.

Advertisement

At stake is what workers can count as income when their pensions are calculated. Generally, pensions are based on three factors: top salary, years of service and a multiplier tied to retirement age. So, for example, public safety workers who retire starting at age 50 generally get 3 percent of top annual salary for every year on the job. Thus a 30-year veteran receives a starting pension equal to 90 percent of top salary.

The issue is what counts as salary. For more than a decade, the three pension systems have been adding in payments for unused leave time, although each system does it differently. There are two types of these payments.

First, some workers, often management, are permitted to annually sell back unused vacation time. Under the new rules, they will be able to continue to count in their pension calculations the amount of vacation they can sell back in one year. However, Contra Costa employees will no longer be able to double the amount counted by timing two sales in one 12-month period.

Second, and more common, workers must be paid for leftover vacation and holiday leave time when their employment ends. Currently, the value of up to a year's leave can be counted. Starting Jan. 1, that will stop.

The current system is inequitable. Workers who save up their leave can collect the value of it many times over in retirement. Conversely, those who use their vacation time during their working years receive smaller pensions for the rest of their lives.

If that sounds absurd, that's because it is. As one state appellate court ruled in 2004, "Such one-time post-termination payments cannot be considered part of final compensation without creating the risk of substantial distortion in the retirement benefits otherwise payable to employees."

But the three county systems have ignored that court ruling, and another similar one. They say their prior agreements with workers to allow the spiking supersedes the court rulings -- and the deals cannot be abrogated by state lawmakers.

At the Contra Costa hearing workers tried to bolster their argument by insisting they had been paying for this extra benefit for years. That's not so.

Contra Costa's actuary calculates how much more should be contributed to the pension system each year to cover the cost of the spiking. It turns out that almost all of that additional cost -- about 93 percent -- is borne by taxpayers.

But that doesn't address the bigger issue, whether employees have an unalterable right to spike their pensions regardless of state law. The legal battle is about to begin.